Marketing intangibles: At Indian Supreme Court’s door step – What to expect?

February 06,2018
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Manoj Pardasani (Partner & Head - Transfer Pricing (North), BSR & Co LLP)

Over the past few years, Indian Revenue have shifted their focus to evaluating complex issues like royalty payouts, incurring of advertising, marketing and promotional (AMP) expenses, management cross charges, share valuation, etc. Lately, the issue of marketing intangibles has become very prominent in India wherein Indian subsidiaries of global multi-national enterprises (MNEs) incurring AMP expenses have been challenged by the Revenue. Indian Revenue allege that the AMP related activities add value to the trademark/ brand (owned by the foreign parent entity) by way of brand building and the local subsidiary must be compensated by the brand owner (foreign parent) either in form of a service fee, or reduced/ nil royalty payments. Since the Indian TP regulations do not provide any specific guidelines on intangibles, other than defining them as part of “international transaction”, the issue has become a much litigated bone of contention amongst the taxpayers and the Revenue.

The AMP issue first came up in 2010 with the Delhi High Court and Supreme Court of India rulings in the case of Maruti Suzuki India Limited[1] but remained largely unresolved. Over the past few years, there have been two landmark Delhi High Court rulings on the AMP issue namely Sony Ericsson Mobile Communications India Private Limited[2] and Maruti Suzuki India Limited (MSIL)[3]. In these two judgments, the Delhi High Court analyzed some important principles regarding AMP expenses - like rejection of application of ‘bright line test’ (BLT), concept of economic ownership, whether AMP is an international transaction, presence of an agreement / understanding / arrangement to presume the existence of an international transaction, etc. More recently, the Delhi High Court in cases of Haeir Appliances (India) Pvt Ltd[4], Valvoline Cummins Ltd[5] and Whirlpool of India Ltd[6] examined the circumstances relevant to determine whether AMP expenses/ activities constitute an ‘international transaction’ requiring an arm’s length compensation. It is only obvious that the facts of each case will differ and the outcome therefor will differ. Even though all these rulings, provided some guidance on the vexed issue of marketing intangible but they were not able to fully address all concerns of both - the taxpayers and tax authorities.

The AMP issue is far from being resolved and Special Leave Petitions (SLPs) have been lodged with the Supreme Court of India on the issue of AMP – both, by the tax payers as well as by the Revenue. Even though the Supreme Court is expected to deliver a verdict that might put this controversy to rest, but it is more likely that the Supreme Court may not rule on the AMP issue in an all-encompassing manner. The key questions that are at the heart of the AMP issue include - whether AMP expenses incurred are an international transaction or not, aggregation vs segregation of transactions, BLT as a method of arm’s length price determination or as a statistical tool, validity of functional intensity approach for AMP quantification, etc.

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